Switzerland declares victory over inflation

 The Swiss National Bank became the first central bank among advanced economies to declare victory over the post-pandemic surge in inflation, cutting its key interest rate by 0.25 percentage point to 1.5 percent and hinting at more cuts in the coming months.

“The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective,” the bank said in a statement. “For some months now, inflation has been back below 2 percent and thus in the range the SNB equates with price stability.”

SNB President Thomas Jordan, who announced last month that he would step down early in September, is entering the final stretch of his 12-year tenure with a bang. None of the other central banks of Western Europe is widely expected to cut for at least another three months.

His move also surprised financial markets: the vast majority of analysts had expected interest rates to remain unchanged at this meeting. The Swiss franc fell 1.1 percent against the dollar and 0.8 percent against the euro, accordingly.

The exchange rate has played a key role in the SNB’s battle against inflation. The SNB, which had bought euros in huge scale in the decade after the financial crisis to stop the franc appreciating, sold foreign currency to the tune of 132.9 billion francs in 2023 to support the exchange rate and keep import prices down. In Thursday’s statement, the SNB affirmed that it “remains willing to be active in the foreign exchange market as necessary.”

In press conference in Zurich, Jordan shot down any suggestion the cut could be his parting gift to Switzerland. “It’s 100 percent compatible with our [monetary policy] framework, as well as our risk management considerations. Inflationary pressures [are] much lower than projected in December, so it was the right time to adjust monetary policy now.”

The SNB said its decision reflected “reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year,” and said it should support economic activity ahead.

Switzerland has been an island of relative price stability in Europe over recent years, with inflation peaking at 3.5 percent while it spiraled to double digits in the euro area and U.K.

According to the SNB’s new forecast, inflation is now likely to remain within its 0-2 percent inflation target over the next few years, after hovering in that range already since June.

"It is a courageous step, but perfectly justifiable when you look at the inflation forecast and the inflation data," Philipp Hildebrand, vice-chair of Blackrock and Jordan's predecessor at the SNB, told Bloomberg TV.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said via X the bank appeared likely to cut again after hinting at further cuts in due course. With its new forecasts pointing to rising unemployment and increasing slack in the economy, the SNB said it “will adjust its monetary policy again if necessary to ensure inflation remains within the range consistent with price stability over the medium term.”

Ahead of the surprise cut, the majority of economists had expected the SNB to cut its key rate to 1.25 percent by year-end. Bank J. Safra Sarasin chief economist, Karsten Junius, one of a small minority that accurately predicted the cut, now sees it hitting 1 percent by then.

Jordan refrained from giving any indication about the path of rate ahead. “We will look at the inflation forecasts in three months and take the appropriate decisions at that time,” he said.